Capitalism without regulation is prone to excesses, driven by individuals pursuing their own self-interest. Price-gouging and provision of inferior quality goods and services are held in check by competition, but there are other aberrations against public morals, or not in the public interest, that require regulation. Historical examples would be the use of slaves, the opium trade, usury, prostitution, child labor, conquest and exploitation of primitive cultures, and sale of weapons or related technology to a nation’s enemies.
Regulation is also required to curb monopolistic practices, where competition is ineffective. There is much talk of the importance of free markets, but unregulated markets are not free. They are prone to cheating, corruption and abuse of market power. What is needed are efficient markets, where there are:
- low barriers to entry for new participants
- low transaction costs
- equal access to information, at the same time
Stock markets are often quoted as an example of an efficient market. Regulation has contributed to this over the years by policing illegal activities such as insider trading, front-running, wash sales, pump and dump, price manipulation, squeezes, and disseminating false or misleading information. But lately the prevalence of high-speed trading has eroded investor confidence, as most market participants no longer have access to price information at the same time. If this continues, the onus is on regulators to allow competitors to set up efficient markets for investors.
Agree entirely. Some supporting thoughts:
In classical economics, capital is just one of four factors of production, the others being land (natural resources), labor and organization (management). Collusion between capital and organization (stockholders and management) and resource-cornering (M&As, cartels, lobbying, bribery) have left labor as the odd man out. With the steady decline of trade unions, the distortion is even more pronounced. A fundamental objective of regulation should be to restore labor’s bargaining power. After all, the majority of the population in any country represent labor.
Second, unregulated free markets are naturally prone to exploitative practices like those set out in this article. Regulation should, therefore, be about creating fair markets. This will go against the instincts of purists and ideologues (Ayn Rand comes to mind). Nonetheless, without a fair market, there can be no fair social order.
Third, we live in an era in which the impact of information is becoming increasingly disproportionate in determining how fair a market is. Penalties for information distortion and access should be far stiffer than they are to act as effective deterrents. The unfortunate irony is governments have emerged as the biggest distorters of information. Who then will regulate? Given the interconnectivity of global markets, perhaps we need to take this aspect of regulation out of the hands of national governments.
My view is that management are merely the agents of capital, in much the same way as unions are agents of labor, and not a separate factor of production. Restoring labor’s bargaining power is best achieved by a competitive job market, where employers have to bid for scarce labor resources. From a macro viewpoint, it is not in corporations interest to reduce payroll costs as this will shrink sales. On the other hand, if we try Herbert Hoover’s approach of driving up wage rates to fuel a recovery, all you achieve is higher unemployment.
I was restating classical economic theory, which holds all four to be separate factors of production. The potential for collusion between capital and management is obvious today. But we have to view this in the context of 18th century markets that were the models for Adam Smith and his peers. Business and industry were largely family-owned at the time, with joint stock companies largely a crown-sanctioned phenomena, employed by colonial powers to mobilize private capital for commercial exploitation of colonial conquests. The distinction between ownership and management was much sharper then.
As for labor, the abuse of its bargaining power by unions has been self-defeating. In my early career, I used to get incensed by the unreasonable entitlement-oriented demands of Marxist-leaning unions in India that were a curse on productivity. However, I fear the pendulum has swung to the other extreme today. Corporations can, and do, systematically reduce their labor force and wage rates when they can get away with it. The rapid expansion of multinational corporations and the resultant outsourcing of jobs have left individual workers with limited leverage in domestic markets. Which is why real unemployment in the US is in the double digits today and real wages have been stagnant or have declined over the past decade. Even as corporate profits continue to soar and corporate tax payments shrink because of offshore loopholes. The coming revolution in robotics and artificial intelligence is likely to make the situation worse, not better. Without unions, individual workers will be caught like deer in the headlamps.
I don’t think unions will solve the problem. No issue with broad-based unions such as IG Metall but Mancur Olson makes good argument that narrow-based are just another self-interest group.